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Any employer that operates an employee benefit trust (EBT) with loans outstanding to beneficiaries or any other arrangement that is potentially caught by the disguised remuneration (DR) legislation.

Summary of proposal

HMRC issued a consultation on proposed changes to the DR rules on 10 August 2016. On 5 December 2016, HMRC issued a technical note and summary of responses which included further draft legislation and HMRC’s responses to comments received on the consultation document.

On 20 March 2017, the Government published revised draft legislation on the DR changes as well as a technical update and explanatory notes to the draft legislation. The technical update (which can be found here) helpfully summaries the main changes from the 5 December 2016 version of the draft legislation.

The main point of note to employers is that the loan charge is to be proceeded with, largely as planned, but with some helpful clarifications and amendments. The loan charge is a new charge that will be introduced on loans made by EBTs and other relevant third parties after 5 April 1999 and that remain outstanding on 5 April 2019. The draft legislation provides for certain exclusions and deals with the requirements for making loan repayments before 5 April 2019 if the loan charge is not to arise.

The Government has acknowledged that its original proposals to introduce a new close companies’ gateway into the DR legislation “could catch commercial arrangements that aren’t DR schemes” and has therefore decided to consult further on these proposals with a view to introducing legislation in Finance Bill 2018. However, the revised draft 2017 legislation includes provisions aimed at tackling the use of DR schemes by the self-employed, with some changes made to these provisions with the intention of carving out commercial arrangements that are taxed in accordance with normal tax rules.

Key changes from the draft legislation

The revised draft legislation and technical update include the following key changes in relation to the loan charge:

The exclusion for loans used to acquire unlisted employer shares has been extended to include quasi-loans. The amended provisions provide for an exclusion for loans and quasi-loans made by EBTs and other relevant third parties before 9 December 2010 that were used to purchase shares in an unlisted employer (or other group company). The loan charge will not apply to such loans or quasi-loans where they are repaid within 12 months of selling the shares.

A new exclusion has been added to put beyond doubt that a repayment of a loan will not, in itself, give rise to a DR earmarking charge.

The draft legislation has been amended to deal specifically with loans and repayments made in currencies other than sterling. Where both the loan principal and repayments are made in the same foreign currency, any repayments will be deducted from the loan principal in that same foreign currency. Where any repayments are made in a different currency, the repayments are converted into the currency of the loan principal using the exchange rates on the dates of repayment. Any foreign currency loan principal outstanding on 5 April 2019 will be converted into sterling using the exchange rate on that date to calculate the amount of the loan charge.

The technical update notes that the format and process for reporting information to HMRC about the loan charge will be provided later in 2017. The draft legislation provides that the loan charge, as a charge under the DR legislation, will be subject to PAYE (and NIC). Any release or write-off of a loan from an EBT or other relevant third party - and where the loan was not included in an earlier EBT settlement with HMRC – made on or after 6 April 2017 will also be subject to PAYE (and NIC). Applying PAYE and NIC to the loan charge may leave some (former) employers with EBTs with a liability and no means of recovering the amounts due in some cases and representations have been made that this may lead to unfairness. The Government announced in December that it would consult further on its earlier proposals on transferring the tax and NIC liabilities in connection with DR schemes with a view to introducing secondary legislation which would be effective in early 2017. We therefore wait for further details on this point.

Other than the decision to postpone the close companies’ gateway, the other changes are less noteworthy insofar as they would concern most employers. However, employers may wish to note that the earlier proposal to deny corporation tax relief for any employee benefit contributions such as contributions to EBTs in any accounting period that begins more than five years after the end of the period in which the contribution was made (for contributions made on or after 1 April 2017) is proceeded with in the revised draft legislation. The only change is to extend this provision to employers who are not carrying on a trade or property business.

Our view

Employers with EBTs (and the trustees of EBTs) with outstanding loans to beneficiaries that have not already entered into EBT settlements with HMRC will want to consider how to respond to the loan charge now that further details are available. Employers with concerns about whether they will have the right to recover PAYE and employee’s NIC from beneficiaries when the loan charge occurs (or if loans are released or written off by EBTs they have previously sponsored prior to 5 April 2019) should consult with the EBT trustees and monitor developments on the transfer of liabilities.